Thinking about the next Big One (for now)

Electronics firms are thinking about supply chain risk management after a disaster-plagued 2011. Will they continue to do so?

On a human scale, tracking the devastation wrought by last year's Great East Japan Earthquake and the subsequent tsunami was a heart-wrenching experience. With more than 15,000 people known dead, many more displaced and video of houses being tossed like scraps of paper on massive waves, not to mention a nuclear power plant on the cusp of a full on meltdown that would have hurt many more, the availability of photoresist for making semiconductors seemed in many ways trivial.

But such is the world we live in. Our hearts went out to Japan, but our heads viewed the devastation with an eye toward how a disruption in the supply of things made there would impact our bottom lines.

Coming off a year that was shaped by these two natural disasters, it's no wonder that semiconductor suppliers, distributors and OEMs are all singing from the same song book about the virtues of ensuring adequate supply in the pipeline. Executives who spoke on an industry panel on supply chain issues at last week's DESIGN West event, moderated by EBN Editor-in-Chief Bolaji Ojo, said the natural disasters of 2011 taught many lessons about risk management in the supply chain.

"Last year taught us a lot about how the supply chain reacts to disruptions," said Karl Braitberg, vice president of supply chain operations and global supplier management at Cisco Systems Inc.

Braitberg said Cisco was fortunate it started its risk management group five years ago. The group is responsible for analyzing risk throughout Cisco's business, from supply chain crisis management to financial risks.

Brad Phillips, director of strategic sourcing at Rockwell Automation Inc., echoed Braitberg's sentiments. Like Cisco, Rockwell had been making a big push in inventory risk management prior to the Japan quake. "When Japan happened, we were very fortunate that we had gotten our investments where they should be."

But, for the electronics supply chain, the most fortunate coincidence of the timing of the Japan earthquake was that it happened at a time when there was an oversupply situation for many components, according to Dale Ford, vice president of electronics and semiconductor research at IHS iSuppli. "It was just fortunate," Ford said. "It wasn't by design."

Ford said he believes that supply disruptions from natural disasters and other events will occur more frequently in the future, and that electronics firms had better be prepared to weather them as best they can. "In terms of risk planning, you have to move from a mindset of, 'this is something that might happen every five to 10 years,' " Ford said, "to 'I am going to have to deal with disruptions of varying magnitudes on an ongoing basis.' "

It's easy enough for firms to heed the lessons of 2011 now, while they are still fresh in our minds. But will these companies have the discipline to continue investing in contingencies for emergency supply disruptions if, knock on wood, we go a few years before the next one? Don't forget that after the man-made crisis of 2001, when the dot com bubble burst and suppliers of all stripes were left holding excess inventories, the pendulum swung toward extremely low inventories on hand and "just in time" manufacturing.

According to Braitberg, it's a natural tendency of companies to question risk management investment at times when risks have not resulted in crisis. Braitberg said it was "tough sledding" at times to justify the investment in risk management in the years before the Japan quake. Companies' willingness to bet on risk is sometimes suspect, Braitberg said, "because you don't see the payback unless there is an issue."

Ford said he doesn't believe the electronics industry can go three to five years between emergencies, be they natural disasters or other types, that will impact the supply chain. "I think there will be different types of challenges," Ford said. "The challenge will be for companies to have balanced responses [to disruptions] in place so that they don't overcorrect."

Moving manufacturing facilities back to the U.S. and Europe will not be easy, but if you want truly geographically diversified manufacturing, it will have to be done. This is one of Globalfoundries' selling points--instead of all of their fabs in Hsinchu, GF has one in Dresden, one in NY, etc.

I attended this discussion at DESIGN West and and was amazed at the level of inter-relatedness of all levels of the supply chain. I was especially impressed with the level of humanity that was expressed across the competitive set of players and the willingness to help each other recover. Great coverage of the topic.

We've heard previously about the extraordinary situation of Renesas' competitors pitching in to help the company get its manufacturing back on its feet. What I hadn't heard before the panel discussion was this: Ali Sebt, president and CEO of Renesas Electronics Americas, siad Renesas was delayed even getting in to inspect the damage at its heavily damaged Naka fabs because Renesas didn't have equipment to detect what gases were present inside (and it would have been very dangerous to enter without this info). Thirteen of Renesas' competitors provided the company with their extra gas detectors so that they could get inside.